Cable Providers Seek Growth Outside TV

Mar 2, 2008  •  Post A Comment

If cable operators are looking to boost returns for their investors, they’ll have to do it without much help from, well, basic cable.
Of the four largest publicly traded cable companies reporting this month (No. 3 Cox Communications is closely held), all reported higher revenues and three reported improved earnings from a year earlier.
But while cable television made up the bulk of revenues, it also was the slowest-growing division at all four companies. Overall results have been blunted by a weakening housing market and increased competition from satellite television companies such as DirecTV and Dish Network, and new digital television services such as Verizon’s FiOS. Such weakness in the cable companies’ core businesses has caused stocks to lag the broader market over the past year.
“That Cablevision reported positive basic subscribers is a remarkable feat given the extensive overlap with Verizon’s FiOS,” said Sanford Bernstein analyst Craig Moffett in a note to clients last week. Cablevision’s 7.4% increase in cable subscribers “represents a clear positive surprise versus expectations, which have been persistently bearish in terms of long-term subscriber retention.”
All of the cable operators have responded to heightened competition by branching out into high-speed Internet and telephone services, while Cablevision has generated additional revenue from the ownership of networks such as AMC, IFC and Voom HD. The results have been mixed, as demonstrated by the fourth-quarter performance of the leading U.S. multiple system operator, Comcast.
The company, with about 24 million subscribers, on Feb. 14 reported a 14% increase in revenue and a 54% jump in profit as costs per subscriber were reduced. Its earnings of 20 cents a share beat the average analyst estimate of 17 cents.
Still, the number of cable subscribers was flat versus a year earlier.
“Signs of a weakening economy are clear in the results,” Mr. Moffett said in a note after Comcast earnings were released. “Basic subscriber numbers have been hurt by weakness in the housing market. And local advertising remains extremely soft, reflecting its disproportionate reliance on sectors such as automotive, retail and financial services.”
Revenue Shifts
As a result, Internet and telephone services are likely to account for a progressively larger percentage of total sales. Last year, Time Warner Cable, which reported fourth-quarter earnings Feb. 6, boosted its Internet subscribers by 15% and its telephone subscribers by 54%, compared with a 10% jump in cable subscribers for the No. 2 U.S. cable company. Fourth-quarter revenue rose 12% while Time Warner Cable’s earnings of 33 cents a share beat analyst expectations by 3 cents.
For third-place Charter, whose stock has lost two-thirds of its value in the past year and is languishing around $1 per share, such trends will likely continue through the year. Charter’s phone subscribers, which doubled last year, are likely to increase about 20% this year, while the company’s basic cable and digital-video subscriber count will be about flat, Citigroup analyst Jason Bazinet wrote in a note to clients last week. Charter, which has 5.6 million subscribers, Wednesday said its fourth-quarter loss widened 18% on a write-down of North American franchises.
Comcast, with the numbers of cable and Internet subscribers almost flat, has boosted sales by increasing phone-service customers while getting more bang for the buck from its cable subscribers by upgrading them to digital video and pushing its video-on-demand services. The company also was able to cut its expenses per subscriber by reducing costly turnover.
“There is a flipside to the weak housing market,” Mr. Moffett wrote on Feb. 14. “Americans are—voluntarily or involuntarily—staying put. That means lower churn, lower gross additions and, in the end, significantly lower activity levels. Margins are benefiting as a result.”
Still, some analysts say cable companies run the risk of falling further behind competitors by focusing on areas outside of television. While Comcast this year has been touting on-demand high-definition programming, others such as Time Warner may have fallen behind satellite TV operators such as U.S. leader DirecTV, which boasts about 100 HD channels, and Dish, which has about 50 HD channels.
“Video, according to management, is the company’s product that currently faces the most competition,” said Bear Stearns analyst Spencer Wong in a Feb. 6 note to Time Warner Cable investors. “Like other cable operators, it appears that TWC has not done a good job of marketing its video product, especially its high-definition offering.”
Stocks Suffering
All of which has scared away investors in cable companies. Time Warner Cable shareholders were unimpressed with its 12% increase in fourth-quarter revenue, as the stock fell 3.1% on the day earnings were reported. Before last week, Comcast’s stock during the past 12 months fell 20% while Charter shares plunged 66%, compared with a 2.2% decline for the Nasdaq. Cablevision and Time Warner, while faring slightly better with price drops of 5.7% and 12%, respectively, also both lagged the New York Stock Exchange’s 2.2% gain over the past year.
Still, cable operators continue to look beyond basic cable for revenue growth. Cablevision, which has about 2.6 million subscribers in the New York area, last week said it turned a fourth-quarter profit largely on higher advertising sales from the popularity of television’s “Mad Men,” which won a Golden Globe for drama series this year and is broadcast on Cablevision-owned AMC. That network’s Feb. 16 premiere of Clint Eastwood’s “Letters From Iwo Jima” was watched in 2.29 million homes, making it the most-watched prime-time movie on basic cable for that week.
“Advertisers are responding extremely well to what we’re doing at AMC,” Rainbow President Josh Sapan said during a conference call with investors Thursday morning. “We’ve seen significant price increases” to advertising rates.


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